Cantel Medical Corp.
Q2 2015 Earnings Call Transcript

Published: 12 Mar 2015

[Operator:]

Greetings and welcome to the Cantel Medical Corp's Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Andy Krakauer, CEO of Cantel Medical Corp. You may begin.

[Andrew A. Krakauer:]

Okay, well thank you, Rob and welcome to our second quarter fiscal year 2015 conference call. Before we start, I'd like to remind everyone that this conference call may contain forward-looking statements. All forward-looking statements involve risks and uncertainties including, without limitation, the risks detailed in the Company's filings and reports with the Securities and Exchange Commission. Such statements are only predictions and actual results may differ materially from those projected. With that said, good morning to everyone. With me on our call today are Chuck Diker, Chairman of the Board; Jorgen Hansen, President and Chief Operating Officer; Craig Sheldon, Executive Vice President and Chief Financial Officer and Treasurer; Seth Yellin, Senior Vice President, Corporate Development; and Steven Anaya, Senior Vice President and Chief Accounting Officer. Cantel Medical achieved excellent financial performance second quarter of fiscal year 2015 with solid sales and net income growth. We reported second quarter U.S. GAAP earnings of $0.27 per share, inclusive of $0.04 of acquisition related non-amortization charges, as compared to the prior year's second quarter earnings of $0.27 per share. Sales increased 14% in the quarter to a $135.4 million, of which 6.5% was organic growth. On a non-GAAP basis, which we began reporting last quarter, adjusted net income increased by 18% over the same quarter last year. Adjusted EPS for the quarter was a record $0.36 as compared to adjusted EPS in the prior year of $0.31. All three major segments, Endoscopy, Water Purification and Filtration, and Healthcare Disposables contributed to our organic sales growth. Our Endoscopy business had strong growth with revenues of $59 million, which set another record for the seventh consecutive quarter. And this would have been a record quarter even without the inclusion of one quarter of sales from our newly acquired business in Italy. Organic sales growth for the segment was strong at 14% and total sales grew 32% from the same quarter last year. Operating profit for this segment, excluding acquisition related transaction expenses and fair value adjustments, increased by 24%. Operating profit growth would have been even higher if not for the significant incremental sales and marketing investments, principally in the U.S., the U.K. and China, as well accelerated R&D expenses. We are very optimistic that our Endoscopy business would deliver good sales growth and increasing operating profits for the rest of fiscal year 2015 and beyond. This quarter we saw a solid growth in our already large installed base of endoscope reprocessing equipment. Equipment placements drive sales of our higher-margin disinfectant chemistries, much of which is our proprietary Rapicide PA product. This quarter our disinfectant and detergent chemistries grew organically by 16%. Our growing base of machines also provides great opportunities to expand our service and spare parts business, which this quarter grew 14% organically. We expect to see further growth in these categories with our newly acquired businesses in the U.K. which we announced in the fourth quarter of fiscal year 2014 and in Italy which we announced at the beginning of this quarter, the second quarter of fiscal year 2015. When combined with our core United States endoscopy business, we see these acquisitions providing Cantel a strong international platform, additional manufacturing capabilities, including European based chemistry production facility and significant growth potential in European and other international markets, particularly in fiscal year 2016 and beyond when we launch several new products designed and manufactured at these sites. On the product development front, we have recently launched several new and improved endoscopy disposable product lines which are starting to generate positive sales momentum. We also have just launched an important new pass-through endoscope reprocessor in the U.K., the RapidAER. New product development focus in this business will remain high and spending will continue to increase as we are working on new products and product enhancements which will benefit us in future periods. Continental Europe, European version of the RapidAER along with two additional state-of-the-art endoscope reprocessors will be launched in European markets and other select international markets in the beginning of fiscal year 2016. Now speaking about Europe, our newly added direct sales organizations in the UK, Germany and for the first quarter now in Italy are off to a good start and demonstrate the benefit of promoting our differentiated and highly competitive product lines directly to end-users in the three largest markets in Europe. We also remain very confident in the strength and capability of the entire Medivators United States direct sales and service Endoscopy team and their ability to effectively launch and grow our expanding full-circle infection prevention and patient safety product portfolio. The U.S. business has had a great first half in fiscal year 2015 and is leading the growth in this segment. As I mentioned last quarter, we have completed a major reorganization of this team, which included adding a number of additional sales and marketing resources, some of which also are now going to support our global sales efforts. And we do anticipate further expansion of this team in fiscal year 2016. Our Water Purification and Filtration segment has shown strong performance for the past three years. Sales this quarter of $42.4 million were equal to the first quarter's record performance and up 4%, 3% of which was organic over unusually strong results in the same quarter last year. Sales this quarter were primarily driven by strong shipments of consumables including filters and sterilants as well as service. Operating profit showed good leverage with growth of 14% over the same quarter last year. The profit increase was primarily driven by the higher shipments and especially the favorable mix of our consumable products, which led to improved gross margins by almost 3 percentage points. And again despite being well below our corporate average gross margins, the improvement is a continuing positive development in this business given the high percentage of capital equipment sales in this segment. During the first quarter, we continued to see broad and increased market acceptance of our heat-based disinfection central and portable water purification systems. These automated systems provide for a higher standard of water purification than the older conventional technology equipment they replace and provide great benefits to our dialysis customers and their patients. These more advanced machines carry higher average selling prices. This quarter approximately 70% of our central system orders and 80% of portable equipment orders were for these higher value technology products. And we expect the adoption rate for these newer products to continue to grow as customers recognize the performance benefits and the cost savings provided by automated heat disinfection. On a further positive note, total orders in this segment approximated sales which leads the business with a strong backlog and bodes well for future quarters. We are also starting to see a pickup in dialysis water purification system renovations in the clinics. In fact, the majority of the 6,000 dialysis clinics in the United States still run older, manual, chemically disinfected equipment that will ultimately need to be replaced. This fiscal year, our Mar Cor water purification unit has taken over management of our Therapeutic Filtration and Chemistries businesses, and these products are now included in our BioScience Products or BSP Group, which already includes other filters and chemistry products as well. This quarter, these consumable products product lines grew by 25% from the prior year. We had good growth from our dialysis customers and new filtration customers, improving sales from our clean-room disinfection chemistries as well as an increased demand from our core blood filtration customers as well. Again, sales growth in this category was a key driver of our margin improvement in this segment. We are optimistic that over time we have some exciting future opportunities with our unique hollow fiber filters as well as our novel new REVOX Sterilization Service technology. We have added and are continuing to add some sales, marketing and product development resources in this unit to pursue what we believe will be profitable growth opportunities in these businesses going forward. A number of these opportunities could be realized in fiscal year 2016. We were very pleased to announce the acquisition of Pure Water Solutions on January 2. This acquisition enhances our service footprint with eight regional offices in the Southeastern United States and with 80% of the sales being non-dialysis add diversification through our service portfolio. Overall, we remain very optimistic that we can continue to grow our Water Purification and Filtration business. Our Healthcare Disposables business reported sales in the second quarter of $25.2 million which was 2% organic growth over the same quarter last year. And I consider this good performance given as we reported last quarter that there were large increases in shipments in the first quarter that were partially driven by pull-ahead sales to distributors in advance of a price increase. Also there were two less shipping days this quarter as compared to last year's quarter. So on a per day basis, sales this quarter were more than 5% higher than the prior year. In this segment we have recently launched some significant new marketing and sales initiatives, plus we have just acquired the DentaPure Dental Waterline Disinfection System which was announced on February 23, which of course is in our third quarter which we are now. This acquired product line enhances our leadership position in infection prevention and control in the dental market and provides a good growth opportunity. We were excited to include this product category in our portfolio at the important Midwinter Meeting of the Chicago Dental Society in late February and we are currently receiving a great interest from the internal markets for this product category as we are exhibiting as we speak at a major biannual dental show in Cologne, Germany. Operating profits for this segment declined by 2%, which was basically in line with the flat sales increase. This was a reasonable outcome given the increase in sales and marketing investments which we are making in this business to expand coverage to a variety of customers in different markets and specifically including a restructuring of the United States sales and marketing approach in the dental market. As we go forward, I remain optimistic about the growth of the Healthcare Disposables business driven by our increasing presence in the sterility assurance market and entrance into the high growth waterline disinfection market as well as from new opportunities in hospital and alternate-care markets. In addition we see continued opportunity for growth from new product development activities and additional international sales growth. We have a number of products currently being registered in several international markets that should bode well for this business in a couple of quarters. In the Dialysis segment, second quarter sales declined by 4% as compared to the prior year, due to a 20% decline in reuse chemistries, partially offset by an increase in lower margin dialysate concentrates. More than half of the decline in the chemistry sales was due to an unfavorable comparison with an unusually large international sale last year. Operating profit decreased by approximately $0.5 million due to the lower sales and as we have made some incremental sales and marketing investments to seek growth globally. Now relative to the rest of Cantel, this segment has become a much smaller part of the overall Company, representing only now 6% of our combined segment operating profit in the second quarter of fiscal year 2015 as compared to 9% in the same quarter last year. Nevertheless, this business remains important for the Company and we work hard to continue to take care of our customers and we are again seeking growth worldwide. Now, I'll turn it over to our CFO, Craig Sheldon to go over some financial details.

[Craig A. Sheldon:]

Okay, thank you Andy and good morning everyone. Before I really get into the earnings release this morning, I just wanted to comment, expand briefly on Andy's comments about non-GAAP financial reporting. So our second quarter Form 10-Q which we will file later on today, we are again including significant disclosure within the MD&A section pertaining to adjusted non-GAAP net income and EPS measurements. This is similar to disclosure contained in our first quarter 10-Q and also similar to the content of the earnings release this morning. Our disclosure will clearly delineate and explain these adjustments and provide full reconciliation to GAAP again similar to disclosure contained within the earnings release. I also wanted to point out that the second quarter results are representative as to why non-GAAP is necessary, since we incurred almost $2.3 million in acquisition related items which are not representative of our normal operating structure going forward. So that's non-amortization related acquisition items. By highlighting such costs as non-GAAP it is evident how approximately the profits in our underlying business grew this quarter. So, if you looked again in the earnings release as well as in the 10-Q later today, all of this non-GAAP will be laid out very clearly making it a little bit difficult to piece together a lot of it in once place so it's very understandable. I also wanted to mention that likely sometime next week, we will filing an 8-K and going ahead and reporting what the non-GAAP numbers were for the third and the fourth quarter and the full year of fiscal year 2014. So, you'll have that information instead of having to wait for our next year earnings calls. So we will do that next week. Now on to the earnings release and let me go through the income statement. As Andy indicated sales increased by 13.8% in the second quarter compared to last year's second quarter with organic growth of 6.5%. Organic sales growth removed the impact of sales related to acquisitions which were not in the prior year results. For the six months sales increased 14.7% overall and 8.0% organically. Top line growth was driven by all three of our largest segments, Endoscopy, Water Purification and Healthcare Disposables. I briefly want to comment on the three acquisitions which impacted the results for the fiscal 2015 periods. So just as a reminder on June 30, 2014, so that was late in last year's fourth quarter, we completed the acquisition of PuriCore, which is included within our Endoscopy segment through the entirety of the fiscal 2015 periods, but excluded in last year's comparative periods. Secondly on November 03, which was early in this second quarter we completed the acquisition of IMS in Italy. So this is reported in our operating results only for the second quarter of fiscal 2015. IMS is also included in our Endoscopy segment. And lastly, on January 01, 2015 we completed the acquisition of Pure Water Solutions, water service business which is included in our Water Purification segment. The results of this business are included only for the month of January 2015 and were not significant. So collectively the PuriCore and the IMS Endoscopy acquisitions contributed to incremental sales of approximately $8.1 million in the second quarter and $14.7 million for the same period. Moving on to gross profit percentage and as reported the GP percentage in the second quarter was 44.7% compared to 44.0% in last year's second quarter and for the six months GP percentage was 44.5% this year and that's up from 43.8% in last year's six months. The improvement in GP percentage is due principally to favorably sales mix in all three of our larger segments coupled with continued efficiencies associated with higher sales volume. And I also wanted to point out that partially offsetting the improved sales mix we had some acquisition related fair value adjustments in the fiscal 2015 periods. In the second quarter the number was $876,000 and in the six months the number was $1.5 million. These were fair value adjustments to related items such as inventory step-up that are now largely out of the numbers, will have very little impact of this going forward. So those numbers and the impact on the gross profit, just to be very clear here, is already included and reflected in reported GP numbers. So we increased GP even despite these unfavorable items which were about 60 basis points worth of margin. So for the second quarter as an example, our gross margin would have been 60 basis points higher just versus the reported numbers were about 1.2% higher, actually about 1.3% higher compared to last year, so very, very, impressive pickup in our gross margin percentage. Overall, we are quite pleased with our strong margins which will be enhanced as I just mentioned in future quarters without the fair value charges which has largely now concluded. And finally also worth noting, is that in both comparable periods we now have the full medical device excise tax. So this will no longer be part of our year to year comparisons because it is in both periods. However it is helpful to know that the medical device tax is still costing us over $1 million of gross profit per quarter and we still haven't given up on getting that law repealed. So hopefully that will happen this year as part of tax reform. Moving now to operating expenses, gross operating expenses increased by $8.2 million in the second quarter and $16.4 million for the six months compared to last year. And this increase really can be segregated into two distinct buckets. One, is acquisition related and two, is – first let me talk about the acquisition related. The increase in acquisition related operating expenses really had two components. The first is the added infrastructure of PuriCore and IMS which contributed collectively $3.7 million in operating expenses for the second quarter and $6.1 million for the six months. And the second component of the acquisition related would be the significant non-GAAP acquisition items that we alluded to earlier. And just so far as the impact operating expenses, those numbers were $1.4 million in the second quarter and $2 million for the six months. So, right there you can see that over $5 million of the second quarter increase in operating expenses was specifically related to acquisitions. And then the other major bucket would be our investment related costs in operating expenses and these are concentrated in several areas. Number one, increased sales and marketing initiatives to expand in the new markets and gain or maintain market share and this includes the hiring of additional sales and marketing personnel and increased travel budgets. Two, is higher commissions due to the higher sales volume as well as modified sales incentives. Three would be normal salary increases and four would be our investments in R&D. All of these investments impact all three of our largest segments, but the majority are specific to the Endoscopy segment. Furthermore, these investments are worldwide, but the bulk is concentrated in key international markets where we anticipate future growth. So clearly, we are investing significantly in our key businesses as we have previously disclosed, very strategically in a very carefully controlled manner. We are also reducing costs in many other areas to pay for some of these investments. So a lot going on in the operating expense area. Moving now to operating income, overall reporting a very slight increase in operating income this year on a GAAP basis. However, it’s much more important to look at the operating income on a non-GAAP basis and on a non-GAAP basis operating income was up by 14% for the second quarter and 13% for the six months. And just a repeat for emphasis, operating income was impacted in the second quarter by a total of $2.3 million and for the six months by $3.5 million, all acquisition related items excluding amortization. And once again this will be detailed in a very, very clear fashion in our 10-Q as well as having been done in our earnings release. Operating income overall continues to be very strong this year in all three of our largest segments. On the interest line net interest for the second quarter has increased very slightly compared to the prior year second quarter, but this decreased by 7% for the six months. More importantly, borrowings this year for new acquisitions have been offset by substantial debt repayments. Furthermore, interest expense is now running at only about 650 – yeah, despite the percentages the gross amount of interest is a really low number, so that’s important to note. We continue to repay borrowings quickly with strong cash flow and very low interest rates. Future interest rates are well protected due to our strategic use of 12-month LIBOR contracts as well as hedging strategies on a portion of our outstanding debt in addition to rapid repayments. And I just wanted to expand quickly on the repayments. So based on our underlying business and our current levels of debt, we could considerably repay all debt using existing cash flow in about a two-year period of time. When you look at outlay our exposure to future interest rate changes is very low. Again, the income taxes, the overall effective rate in the second quarter is 37.2% and that’s down from the first quarter and for the six months the overall effective rate is 38.3%. Now this is a general statement. I would say that rate is a bit on the high, I'm sorry I wanted to highlight a couple of items that were specific in the tax area. Number one is that virtually all of our profits have been generated in the United States, where the effective rate is close to 37.5% on a normalized basis, so right now with our current business that is the baseline. Number two, in the second quarter we had a tax benefit related to the reenacted R&D credit. That helped a little bit in the second quarter, but unfortunately this was not a prospective tax credit. So starting in January 2015 we won't get to record that tax benefit again until Congress decides to reenact it again, which I'm sure will happen and then we will report it in the future. And three, this is really what I want to emphasize, internationally and by and large the tax rates in the jurisdictions that we operate in are quite lower than the United States and as of this time we have not generated profits collectively in these locations. Few substantial strategic investments as we've highlighted earlier as well as high levels of acquisition cost, which won’t be repeated and probably some of those acquisition costs are not tax deductible. So these lower rates right now without the profits are not helping the company’s overall effective tax rate, but as it is clear through of this and get this businesses moving forward and begin to make money which we fully expect to do, then in fact we will get the benefit of lower tax rates, so that will be a substantial help to the overall tax rate. And finally in October, our Board approved 11% increase in semi-annual cash dividend of $0.5 for a penny share of common stock which is $0.10 annually and this was paid in January 2015. Very quickly I wanted to run through the balance sheet which remains very strong. We have $24.1 million of cash and cash equivalents at January 31, $115.7 million in working capital and current ratio of 2.9 to 1. Our funded debt at the end of January was $95.5 million. This includes $37 million of borrowings this fiscal year to fund the IMS and Pure Water acquisitions. Meanwhile as always we will continue to paydown very significant levels of debt. We paid down $10 million in the second quarter to go along with $12 million that we repaid in the first quarter. Our net debt position at the end of January was $71.4 million dollars and this is an increase of only $23 million since last year end despite funding of $37 million for the two acquisitions. Our gross debt-to-equity is only 0.25 at January 31, and our gross debt-to-rolling 12-month EBITDA is 1 [ph] or 0.97. Overall EBITDAS was $25.5 million in the second quarter and rolling 12-month EBITDAS is $98.6 million. And finally just to remind everyone, today is the filing deadline for our 10-Q and we will be filing that before the close of business this afternoon. At this point, I would like to turn the call back over to Andy for some closing remarks.

[Andrew A. Krakauer:]

All right. Thank you, Craig. In summary, Cantel Medical continued its strong performance in the second quarter of fiscal year 2015. We achieved excellent sales growth and record adjusted earnings. This quarter exemplifies why we are so optimistic about the future of the company. Despite significant investments in future growth drivers we improved adjusted net income by 18%, driving sales growth while focusing on increasing gross margins as Craig just pointed out, 1.3 percentage points accelerating the growth of the businesses we acquire and driving overall operating leverage as a result of increased volumes and careful expense management. More importantly, all of our major businesses are great growth prospects and the recent additions of businesses in the UK and in Italy in Endoscopy and one acquisition each in Healthcare Disposables and Water Purification and Filtration segments have added important contributors to future global growth. The worldwide market potential for our products continues to grow and as we’ve discussed over the past year and a half our strategic plans support the aspirations to double sales and profits in the next five years and we are now half way through year two of that plan. These are our aspiration and not predictions, but we are optimistic that we can achieve these goals. Detailed market analyses have shown that we now compete in total addressable markets again in excess of $5.5 billion and we are looking at programs that could potentially grow that potentially and significantly further. This opportunity and our clear growth drivers are reasons why we believe that Cantel Medical is very well positioned for meaningful, sustainable growth in the medium to long-term. We are focusing on substantial sales and marketing investments to promote newly launched products, to grow international sales and to increase penetration in our existing and growing U.S. markets. We continue to invest in our direct sales teams in the U.S., Germany, and China and now in the U.K. and Italy where we have also made strategic acquisitions. These are mostly upfront strategies for this fiscal year. We are also investing in future new products, disposables, chemistries and equipment, which we believe have large upside potentials. This quarter we had a large increase in R&D, of about $700,000 or 29% increase. As we are in the product development process of a number of key new products, product platforms and upgrades, including in our newly acquired portfolios in the U.K. and in Italy, you should expect to see us continue to invest heavily in these categories over the next few quarters as these investments are required to build our foundation for us to achieve our medium and long-term growth goals. Now, to achieve the objectives of our five-year plan, we added a number of sales and marketing positions last fiscal year and have continued to add in the first half of this fiscal year 2015. While most of these investments relate to Endoscopy and international, we are also adding positions to strengthen our Healthcare Disposables and our Water Purification and Filtration businesses mostly to those in North America. Not only are we adding to our sales and marketing teams, but we are also adding needed infrastructure, support roles such as finance, HR and even general management all over the world. In the second quarter of fiscal year 2015, we added almost 20 additional professional positions and we have planned to add approximately 45 to 50 more over the rest of this fiscal year. The majority of these positions are in sales and marketing and about 40% of them are dedicated to international markets. Despite these substantial investments in the business, we expect to meaningfully grow annual earnings this year, besides increased profits driven by sales growth, again we have implemented a number of cost and operating expense efficiency programs to help pay for some of the investments. We are also going to continue our success in identifying, executing and integrating acquisitions worldwide. This is a core competency of our company that has brought us top-notch entrepreneurial management, new and high margin products and additional growth in sales and profits through our proven strategy to invest and accelerate the growth of our acquired companies. The continued search and identification of synergistic markets and potential acquisition targets is the key role of our senior management team and we continue to look at a number of potential targets at the moment mostly in the United States. We expect to continue to have an excellent fiscal year 2015 and our first half has already been very strong. Fiscal year 2015 will be a year of continued investments to accelerate the future growth. Nevertheless for the rest of this fiscal year we expect to perform at about the same level as we have in the first year, which will show very significant year-over-year growth as we go into the second half. We are committed to profitably growing the Company while serving our customers and benefiting our shareholders. Again we have a leading position in growing multibillion-dollar infection prevention and control markets, very exciting opportunities for new products and expanding worldwide, again markets worldwide. Our entire organization takes great pride in our mission to provide the products, the services and the guidance to mitigate infection risks, improve safety and patient outcomes and ultimately save lives. And I’d like to personally thank our 1,700 loyal and hard-working employees for their great efforts and achievements in the second quarter of fiscal year 2015. Thank you everybody for listening. We do again look forward to speaking to you on our third quarter fiscal year ’15 conference call in early June. And with that Rob, I’ll turn it over to you to take some questions.

[Operator:]

[Operator Instructions] Our first question is from Tom Gunderson with Piper Jaffray. Please proceed with your question.

[Thomas Gunderson:]

Hi, good morning everybody.

[Andrew A. Krakauer:]

Hey, Tom.

[Thomas Gunderson:]

So Andy, in your closing remarks you talked about R&D investment and in the Q1 conference call we were talking a little bit about, I think you were saying that soon after that call you were going to be evaluating all of the research projects that were going on. Was there any reduction in projects and regardless of whether the projects went up or down can you remind us what maybe the top two or three areas that you’re looking at in that overall research expense investment?

[Andrew A. Krakauer:]

Well, let's see what we can answer. I'll tell you what, I'm not sure what can talk about first. We are working on new chemistries for various applications. We are working on three new reprocessing endoscope reprocessors and some of that actually expanded with the acquisitions in the UK because one is in the UK and one is in Italy. We are working on new water purification equipment and working on a number of new disposable products. There are some significant programs that we are actually continuing to evaluate, how fast and in exactly what way that could expand our market opportunities that we just don't really want to talk about from the point of view of a competitor point of view. But I would say overall we are being careful with growth in our R&D spend. We are evaluating the programs very carefully, looking to make sure that we hit the growth targets that we are trying to achieve. So it’s probably is a “meeting” that we have which by the way we have every month and having again next week, actually in two weeks. We have approved some new programs, and then there is still I would say at least one or two very significant programs that we are still evaluating, still doing feasibility and the decisions to spend even more money, at even a higher pace than we are going now what probably we made in a quarter or two. I hope that is helpful.

[Thomas Gunderson:]

No, that is, and interesting let's do that every month. Not all companies are that attentive to R&D cost, which as you know can sometimes get out of hand. On the income statement, gross margin has continued to go up and you mentioned despite that half point one time or two time pushback, is that gross margin and on tax rate, should we look at, I understand your O-U.S. profits being low and not helping on the tax rate, but for the rest of the fiscal year should we just assume that the tax rate stays the same until the rest of the fiscal year or should we expect were at, at least this new level of gross margin?

[Andrew A. Krakauer:]

Yeah, you can talk about taxes.

[Craig A. Sheldon:]

I'll deal with the tax first and then Andy if you want to handle the gross profit. The tax rate, let me just tell you, it’s really complicated. There are so many pieces to the tax rate that are moving around constantly and part of it too is the continued uncertainty about tax rate changes. You know, for example we no sooner bought the Italian company and there was a federal tax change in that country, so we are always trying capture these moving pieces.

[Thomas Gunderson:]

By the way that was favorable.

[Craig A. Sheldon:]

That was much favorable. Having said that, for next quarter and may be even into the fourth quarter the tax rate will probably not move too significantly from where it is now. I do think internationally we will slowly, but surely, start to improve that tax structure. We did have the R&E tax credit, which was a onetime item this quarter and that will not be repeated. But on the flip side we have a lot of acquisition costs which were not deductible as we did and those were significant numbers as we outlined. So that will help. So, all in all I can’t really see this tax rate going north of where it is now. It will either stay where it is or if anything will start to slowly creep lower until we really gather some momentum in the next fiscal year internationally and then you could see some even more serious moment. I think that’s where we're headed. I know if it’s a bit of a vague answer, but it’s really hard to pin this down exactly, yes but not higher.

[Andrew A. Krakauer:]

I think not higher is the way to go and then hopefully we will get some upside as more profit is received international markets with some of these one-offs to go away. But again we did have the favorable U.S. reversal. So I would probably leave it where it is for the rest of the year. As far as gross margin goes, our goal has been and we’ve been saying at this point to move the company of our size is slow and steady improvement. I would be disappointed if our margins would fall backwards from where they are. I mean, we’re certainly pushing products like chemistry and some of these other products that have higher margins and I expect the margins to improve in the international locations from where they are. Even on an adjusted basis our European acquisitions are all very actually close to our corporate already and I expect them to get better. As we start producing chemistries in our plant in Italy, that we can also ship elsewhere, that’s going to help the picture, particularly products that are going to be – that we actually sell in euro, so having that chemistry plant is going to be very helpful in the current environment. So, if I was an analyst and I was not calling it out, I would probably leave everything where it is, but and then hope for a little upside, but definitely we are not looking to go down.

[Thomas Gunderson:]

Thanks. And with the – you’ve been talking a lot about UK, Germany, Italy was and the news likes to talk about the U.S. dollar versus the euro everyday it seems, was there any FX impact to either revenues or unless you got more employees to the bottom line may be favorably?

[Craig A. Sheldon:]

I will answer that question. This was a more involved FX quarter than I can ever remember that we had. And on a net basis we had a very material FX loss this quarter. We do have hedging strategy in place in certain areas. The two areas that we didn't have well hedged in the first quarter we had opposite results. We had some losses on the funding of our Italian acquisition, but we had some gains on the FX side in our Canadian operations. Those two basically offset each other. So it’s all but noise of the FX this quarter and there was a lot of noise. It really netted down to a very small number and not even a number that is even worth having a conversation about.

[Thomas Gunderson:]

All right. I got it. Thanks and then last question and that's around is on the disposables business, I get the price increase and people bought in front of that and that lowers Q2, but has that flowed through now, should Q3 be normalized and can you give us any sense of how big or small that over buying was or buy forward was in Q1?

[Craig A. Sheldon:]

Well, you know, it’s a little hard to say, but first of all we do believe that third quarter it reverts back to normal. We also have, we returned back to much more selling days, and in fact one actual selling day more than the prior quarter in the third quarter of last year. So I don’t know if the number is $1 million or $2 million. We really don’t know exactly, but how we put it in that range. It could have been what the percentage is, but I think we are rolling in and I think we’re definitely back to normal in that business.

[Thomas Gunderson:]

Okay, thanks for that and thanks for the other answers. That’s it from me guys, thank you.

[Craig A. Sheldon:]

All right Tom, thank you.

[Andrew A. Krakauer:]

Thank you.

[Operator:]

Our next question comes from Mitra Ramgopal with Sidoti and Company. Please proceed with your question.

[Mitra Ramgopal:]

Yes. Hi, good morning. I was just hoping to get some color regarding a couple of the recent acquisitions you did. I was wondering if on the - regarding the DentaPure acquisition if you can give us a sense in terms of what you view the market opportunities, both domestic and international, and also on the IMS transaction, if you can give us a sense of the competitive environment in Italy or [indiscernible] and what are you expecting from that acquisition in terms of what it would bring to the table for you?

[Seth Yellin:]

Thank you, Mitra. This is Seth Yellin here. On the DentaPure acquisition, this is our first entry into the dental borderline disinfection market and we think this is a very attractive market, fits very well in our infection prevention and control portfolio in the dental space through our Healthcare Disposables business. We think the market itself, the end retail market in the U.S. is in the range of probably around 100 million total size. Then to address the market we think it’s at very, very early stages of adoption probably 15%, 20% type adoption currently, but it’s a very high growth. We're very happy with the DentaPure product category that we acquired. We think it’s best in class and we think that this is a product line that we will be able to manufacture and very efficiently and have one to our selling organization at Crosstex and we think we can be very successful. Internationally I think that the market is at an even earlier stage of adoption. I wouldn’t venture to say what that market opportunity is. We think we haven’t really done that analysis yet, but we think there is a good market probably equal to the United States, but it’s early days. You know, I think this category certainly fits incredibly well into the Crosstex's portfolio both and it is very complimentary to some of the other products we are selling in the sterility assurance and biological monitoring portfolio that we think will help to sell the story of Crosstex as the infection prevention control leader in the dental space. So we're very enthusiastic about the potential of this acquisition. I'll let, Jorgen wanted to speak I think about the Italy opportunity and the marketplace.

[Jorgen B. Hansen:]

Yes, thank you Seth. Yes in fact that has been a refit our Italian theme last week, so I have sort of fresh updates from there. Just, maybe just to remind the rationale for the dental acquisition was really three main things. First, IMS the company we acquired November 2, is the market leader in term of endoscope reprocessing in Italy. So we bought the company that has the lead market share and has a reprocessor that we believe is shown to be very competitive in Italy and we also think has opportunities outside Italy both in Europe and rest of the world. Secondly, the side is chemistry manufacture which is very important even with the latest development in FX even more important to us than it was just few months back. This enabled us now to manufacture chemistries in Europe and we as of last week now have approved, getting approval to manufacture our Rapicide PA in the Italian site. We can supply customers in Europe with local manufacturing there. And even more important we can supply the UK company that bought in June with chemistries as well and they did not have a direct supply of chemistries before, so that opportunity. Then the last value driver for the Italian team is to launch a broader portfolio of endoscopy products. The sales team was trained last week and we now ready to rollout this product line in Italy just like we did in the UK and really has shown to be the winning model really copying the work that we're doing in the U.S. and driving the similar programs into what the cost and so. I'll say overall a quarter and that's been a very satisfactory acquisition for us. It is hitting the strategic points that we are looking for and the team is doing an excellent job on driving through the strategic objectives that we set on for them.

[Mitra Ramgopal:]

Okay, that's very helpful. And just a follow up again for the acquisitions, typically in terms of the acquired companies are you looking at companies with margins that have the potential to be at least in line with the corporate average or even higher or is that really not much of a factor, it is more what you are seeing on getting market share and expanding the product offering?

[Andrew A. Krakauer:]

No, I wouldn’t say we have any absolute litmus test, but in general we focus on companies that have gross margins that will be accretive for corporate average. I think that in general is in our philosophy. I wouldn’t say that there are no exceptions to that rule but generally we're looking to drive margin across all fronts and gross margin is the key performance that we look to.

[Mitra Ramgopal:]

Okay, thanks and then Andy I was just wondering and now coming back to the five-year plan and the doubling the price of the company, I believe right now about 85% of the revenue is from North America, if you have to kind of give a rough sense if you can at the end of the five years, how much do you think the business is going to change towards international vis-à-vis the U.S.?

[Andrew A. Krakauer:]

We had in our plan and we feel we are on target with that plan given A, the acquisitions and the investments we are making and including where we hope to be, in places like China and Germany that even as our business is twice the size our international operations would be represent about 30% of our sales.

[Mitra Ramgopal:]

Okay, thanks again.

[Andrew A. Krakauer:]

All right Mitra, you are welcome.

[Operator:]

[Operator Instructions] There are no further questions at this time. At this point I'd like to turn the call back over to management for closing remarks.

[Andrew A. Krakauer:]

Okay, well again everybody thanks for listening. We will be back for our third quarter fiscal year 2015 earnings report in early June. Take care.

[Operator:]

This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.